Connectivity & Growth: Airports

Connectivity
and growth
Directions of
travel for airport
investments
www.pwc.com/capitalprojectsandinfrastructure
November 2014
What’s inside:
Planning for sustainable
aviation growth p 3
Airport transactions:
Airport privatisation
elevates deal activity to
higher altitudes p 6
Air connectivity: Why it
matters and how to
support growth p 11
Propensity to fly in
emerging economies:
What do the trends mean
for aviation
infrastructure
investment? p 20
Keeping airport projects
on course in a turbulent
world p 29
Airport infrastructure in
Asia: Coping with the
Demand Surge p 33
Has the trend line
shifted? The impact on
airport valuations p 38

2 PwC | Connectivity and growth
Introduction
The aviation market has always been a cyclical one – a long-term growth trend punctuated by demand shocks that rein in investment and impact traffic. As we emerge from the longest sustained recession in 80 years, the indicators are that the global aviation market has turned a corner, with traffic returning, fuel prices falling, and the impact of new technology and business models aiding a return to profitability. However, patterns of growth have not been consistent. While emerging markets, especially in Asia and the Middle East, are strong, recovery in Europe has been weak and patchy, to say the least.
As we have predicted, the ‘pivot to Asia’ continues in the aviation industry, following strong economic and population growth patterns – not only increasing the Asian links to the world but, significantly, building connectivity throughout regional and domestic markets.
As patterns of connectivity shift and established markets such as Europe and Japan see their markets transform away from outbound growth and toward inbound opportunities, the impacts of global aviation infrastructure investment will be significant.
In this year’s compendium we have focussed on the changes being experienced in the global aviation markets. The aviation sector does not operate in isolation; on the contrary, it is inextricably linked to globalisation, regional economic development, tourism and national competitiveness. Connectivity is at the heart of the value provided by the aviation sector to the broader economy, and it is a measure of the health of an airport, a city, and a region. We explore the relationship between the concept of ‘propensity to fly’ and local aviation market potential as we search for new growth markets. And we focus on
Yours truly, Asia, looking at the challenges and opportunities that rapid aviation development brings.
We also explore how the airport transaction market and airport valuations have been impacted as the aviation market aligns to new patterns of growth. Transaction growth in Asia and in new markets such as Japan and the Philippines will allow us to test and challenge our previous assumptions regarding airport values. New players will continue to enter the aviation infrastructure market, as regional opportunities are taken up by new players expanding their interests and taking advantage of the opportunities that connectivity brings.
I hope you will find this year’s articles interesting and provocative, and I
look forward to debating and discussing these issues with you over the coming year.
Michael Burns
Partner, PwC UK

3
Planning for sustainable aviation growth
Planning for sustainable aviation growth
The global economic recovery remains uneven, but there is a clearer pattern of growth now. After a surge in economic growth in 2010 and 2011 as the major economies bounced back from the financial crisis, global GDP growth has been relatively subdued since 2012. According to the IMF, world economic growth averaged 3.3% during 2012-2014, slightly
below the 3.5% long-term average since 1980.
Three main factors have contributed to this muted global growth performance. First, the major Western economies are experiencing a disappointing recovery – because the tailwinds of easy money, cheap imports, and strong confidence that were present before the crisis are no longer supporting growth1.
Second, the poor performance of the economies of southern Europe and France has exerted a downward drag on growth in the euro area and the European Union more generally. A substantial part of the European economy is experiencing a prolonged structural adjustment. Moreover, economic policies have been slow to correct underlying problems such as lack of labour market flexibility, high public spending and associated tax burdens, and a less business-friendly and business-like economic climate.
Third, the major emerging market economies have experienced much more variable and uneven performance. China continues to power ahead – though even here, growth has eased back from the 10% plus average GDP increase in
2002-2011 to around 7-7.5%. India continues to grow at 5-6% a year, and the IMF expects it to be growing faster than China by the end of this decade. But outside Asia, a number of other large emerging market economies have been struggling. During 2012-2015, the IMF now projects that Brazil and Russia will both grow on average by just 1.3% a year. South Africa is not doing much better, with around 2% growth. A common feature of growth in Brazil, Russia, and South Africa is that it is heavily driven by energy and commodities, where global prices have been weakening since 2012. We have also seen political instability adversely affecting growth in all three of these economies – most recently in Russia.
Dr Andrew Sentance
1 “Rediscovering growth: After the crisis” - http://londonpublishingpartnership.co.uk/rediscovering- growth-after-the-crisis/

But it is also possible to take a ‘glass is half full’ view of this global growth environment. There are three poles of growth in the world economy that appear to have survived and rebounded since the global financial crisis: the Asia-Pacific economies, North America, and northern and eastern Europe (including the UK). These three poles (including Japan and Australia within the Asia-Pacific region) account for nearly three- quarters of total world GDP. Sub- Saharan Africa is another dynamic region of the world economy with GDP growth around 5% in 2014 and forecast to continue an average rate of 5-6% in the next five years. If Africa continues to perform well along with the other three major growth regions, we will have robust growth across 75-80% of the world economy in the second half of this decade.
This is an attractive prospect for the global aviation industry – and it is reflected in the investments and plans being made for expansion. Aircraft orders remain strong, and new orders continue to outpace deliveries. The current order books for the major aircraft manufacturers imply a 50% increase in the commercial aircraft fleet over the next 7-10 years.
But we have been here before. When the world economy and the air travel market turns up, airlines pile in orders and then the next downturn exposes a major capacity glut. How do we avoid such a feast-and-famine outcome in the next 5-10 years? How should the major players in the aviation industry plan for sustainable growth?
For airlines, the watchwords should be profitable growth, cost control, and connectivity. Growth opportunities need to be profitable. The airline industry has been a low margin industry for too long, and the more successful modern airlines now recognise this. When I was Chief Economist at British Airways, we set a 10% operating margin target in the early 2000s, which compared with a 2-3% historical average for the industry prior to that date. Chasing volume growth supported by declining yields has bought financial losses and turmoil to many airlines and their investors. So airlines need to undertake a careful evaluation of growth opportunities, both in terms of new routes and additional frequency of service. They should not be seduced by the optimistic forecasts presented to them by aircraft manufacturers, which rarely mention the profitability of growth opportunities.
To achieve profitable growth, airlines need to control costs and develop their networks by improving connectivity. Connectivity is at the heart of what makes airlines successful – finding new routes, either directly or via an efficient hub-and-spoke network operation. As new cities develop around the world – particularly in Africa, Asia, and other emerging markets – there will be many new route development opportunities.
Airports face a different set of growth issues. Unlike airlines, which can expand capacity quite quickly by ordering a few more planes and finding new runway slots to operate, airport capacity expansion is lumpier, requiring longer lead times as well as much more intensive stakeholder dialogue. This is most noticeable in the major Western economies. In the UK, we have had 15 years of discussion about new runway options at the major London airports, and still no decision has been made – let alone any concrete or tarmac laid. The UK may be an extreme example, but similar issues exist in many other advanced economies where there is great sensitivity about the local and environmental impacts of aviation expansion.
Connectivity is at the heart of what makes airlines successful.
Canada2.5UK2.6Germany1.6Greece1.8IrelandFranceSpainItalyBrazil2.50.91.70.61.5x.x= GDP growth in 2015South Africa2.5India6.5China7.3Russia0.5Japan1.2Australia2.8US3.1Mexico3.7
Source: PwC main scenario
Figure 1: Global growth prospects for 2015

Planning for sustainable aviation growth 5
In developing and emerging markets, airport expansion appears easier – and is often supported strongly by the regulating authorities as a means of providing strategic support to economic growth in a region or nation. But that carries a different risk – of over-ambitious expansion – akin to the problems that the airline industry has experienced by over-investing in capacity in the past. Also, alongside airports, airspace capacity needs to be developed. In Europe and North America, there is a high degree of capability in airspace management that can be deployed in Asia, the Middle East, and Africa as these regions start to experience airspace congestion around major cities and airport hubs.
The final issue bearing on the aviation growth agenda – which affects aircraft/engine manufacturers, airlines, airports, and airspace managers alike – is the environmental challenges facing the expansion of the industry. At face value, the 50% increase in the commercial aircraft fleet represents a potential increase in aircraft noise, local air quality problems around airports, and greenhouse gas emissions. The aviation industry is dealing with all these issues – but the pace of technological change will not counter the adverse environmental impacts of future growth in all areas. A sustainable growth trajectory for the aviation industry therefore requires an acceleration of effort to address the environmental consequences of expansion – which will raise costs for the industry and air travellers over the longer term.
The aviation industry worldwide has been remarkably resilient in the aftermath of the global financial crisis. The industry has coped much better than after 9/11, which created more financial distress and business failures. One reason for the improved coping is that there has been a process of industry consolidation in the more mature regions – US and Europe. At the same time, there have been significant growth opportunities in Asia, the Middle East, and Africa.
But as the industry shifts from survival to expansion mode, new issues are emerging: the risk of over-expansion in airline capacity; the difficulties of expanding airport and airspace
(3%) 0% 3% 6% 9% 12% 15% (2%) 198019821984198619881990199219941996199820002002200420062008201020122014 0% 2% 4% 6% 8% 10% GDP (LH scale)RPKs (RH scale)
Source: IMF and ICAO/IATA
Figure 2: Global growth is a key driver of air travel
Air traffic (RPKs) and World GDP – % per annum change
About the author: Andrew Sentance is a Senior Economic Adviser at PwC UK and is a former Chief Economist at British Airways (1998–2006) and a former member of the Bank of England Monetary Policy Committee (2006–2011). He is based in London (andrew.w.sentance@uk.pwc.com, +44 (0) 20 7213 2068).
Key contact for Economics:
Tim Ogier, Partner, PwC UK
(tim.ogier@uk.pwc.com,
+44 (0) 20 780 45207). capacity where it is most needed; and the long-term environmental challenges of a rapidly expanding global aviation industry. Looking ahead, these are the big challenges to sustainable growth of the aviation industry.

Airport transactions: Airport privatisation elevates deal activity to higher altitudes
Executive summary
Your average airport investor is a pretty opportunistic, yet conservative sort: people rarely make investments in airports for short-term gain. Consequently, despite the shoots of economic recovery only starting to show in 2013 and 2014, airport investors were ahead of the curve – seeing transactions rocket from a low point of US$3.5 billion in deals in 2008 to c.US$21 billion in 2012 and US$18 billion in 2013.
On top of investor foresight, governments have finally come to grips with the requirements of privatisation deals, with assets sold in Portugal, Brazil, North America, and Turkey, and with Japan, Greece, and France launching processes. We expect this trend to continue, with 22 countries currently looking to let concession at least 40 assets.
Whilst deal activity has risen significantly, optimism in the investor base has not followed suit. Values have risen much more cautiously, with average deal multiples in UK/Europe recovering a little, but not reaching the heady pre-crisis heights. Some recent deals suggest that the competition for assets may be starting to intensify, particularly for attractive assets, which may drive deal multiples upwards – we will continue to watch developments with interest.
Peaks in deal activity
The airports industry has been a hive of deal activity over the past 24 months, with deal volumes reaching
a peak of 20 deals in the second half
of 2013, generating deal value of US$13 billion. Deal volumes and value have since fallen in the first half of 2014, which we anticipate reflects a gentle breather before a further wave of airport privatisations in Japan, France, Greece, and Southeast Asia as well as airport exits in the UK/Europe.
Airport deal activity has historically been driven largely by European transactions, particularly in the UK, which has by far the most developed private marketplace for airport assets. In the first half of 2011, UK/Europe airport deals accounted for 83% of deal volume.
However, the UK market is becoming saturated (and stunted to a certain extent by its inability to decide on the location of new runway capacity). As a result, investors have cast their nets further afield, with fund managers looking for opportunities to invest in growth; direct investors focusing on more stable, reliable assets; and strategic buyers focusing on assets that complement existing portfolios.
Bernard Chow and Colin Smith

Airport transactions: Airport privatisation elevates deal activity to higher altitudes 7
The airports industry has been a hive of deal activity over the past 24 months.
5010152025204681012141618H111H211H112H212H113H213H114 Number of deals$bn Other e.g. Turkey, KSASouth AmericaRussiaAPACNorth AmericaEuropeUKDeal volumes
Figure 1: Global airport deals by region
The first half of 2012 saw the first real emerging market activity, with Brazil leading the charge (the US$9.5 billion Guarulhos International Airport and US$2.2 billion Viracopos International Airport privatisations). The UK and Europe responded in kind, taking a 70% share of deal activity in the second half of 2012 and first half of 2013. Notable European deals in that period were the ANA privatisation
(US$4.1 billion) and Heathrow finally saying goodbye to Stansted
(US$2.3 billion), whilst Manchester Airport Group sold a stake in itself to fund the Stansted acquisition
(US$1.4 billion). Together with Ferrovial’s sale of chunks in Heathrow itself to pension and sovereign wealth funds (US$1.5 billion) and Hochtief’s eventual disposal of its airports division (US$1.5 billion), the glut in European activity over the 12-month period was compounded.
Privatisations
South America has been the main region for airport privatisations since January 2012, accounting for
US$17 billion of the US$21 billion globally from January 2012 to September 2014. In Brazil, five airport concessions were awarded in Sao Paulo, Rio Grande do Norte, Distrito Federal, and Belo Horizonte. Colombia and Panama also saw airport privatisations. Outside of South America, the main privatisations were in Saudi Arabia, Turkey, Puerto Rico, and Croatia.
Notable in its absence was the anticipated liberation of US airports from government and state control. Only Puerto Rico managed to get off the ground, with Chicago Midway again falling by the wayside. Going forward in the US, a terminal concession-based model appears more likely than full airport privatisations, which may limit interest from mainstream airport investors.
Source: Infranews, PwC analysis

20468101214H1112.0- 6.23.11.55.1H211H112H212H113H213H114 Deal value ($bn) and volume Value ($bn)Volume10.2
Figure 2: UK airport traffic and European transactions
Figure 3: Global refinancing activity
Stable growth in valuations
Despite market conditions appearing to set the stage for a valuation bubble, evidence suggests that investor caution has prevailed for most assets, albeit with some exceptions.
As explored in our airport valuations review later in this document, average deal multiples have increased – particularly in Europe – with EBITDA multiples of 14-18 for faster growth regional airports and 10-14 for mature, larger airports.
The trendline suggests that valuations are unlikely to see a rapid, sustained return to the heady heights of 2006- 2008, when multiples of 20-plus were not uncommon. That said, some emerging market deals are bucking the trend, with investors banking on strong growth from new airports with untapped commercial potential.
Refinancing activity – Alongside a return of airport deals, we also note a resurgence in refinancing activity, largely to replace acquisition debt raised pre-crisis, as airport owners take advantage of improved trading conditions driven by recovery in air travel and increased availability of debt financing.
- 5.0 x 10.0 x 15.0 x 20.0 x 25.0 x10015020025030035019961998200020022004200620082010201220142016 EV/EBITDA multiplePax (million) UK terminal paxAverage transaction multiple2000-2002Avg. 15.0x2003-2005Avg. 17.1x2006-2008Avg. 22.4x2009-2011Avg. 14.2x2012-2014Avg. 14.4x
Source: CAA, DfT, PwC analysis, Press
Source: Infranews, PwC analysis

Airport transactions: Airport privatisation elevates deal activity to higher altitudes 9
The investor landscape
As highlighted earlier, we expect privatisation activity to continue growing apace, as airport sales remain attractive to governments seeking to realise cash through asset sales. Airport privatisations also serve as a strong mechanism to encourage investment and stimulate economic growth.
Greece, Spain, France, Japan, Brazil, and Ireland have all announced separate privatisation drives between now and 2016. In Europe, the first wave of Greek and French regional airports will have received investor bids in September/October 2014 whilst the partial privatisation of Aena was also launched with an envisaged stake sale of 21% being made available.
The Japanese Ministry of Transport meanwhile highlighted four airports for its first wave of privatisations, starting with Sendai Airport and followed by New Kansai, its third largest airport. The government is looking to let concession four airports between 2014 and 2019, followed by a further 16 airports.
50101520253035Aena – 187m Pax (in millions) DomodedovoSheremetyevoFukuokaNiceGreece – 2nd phaseToulouseGuararapesAmmanBordeauxSendaiKotokaHiroshimaShannonRostovTakamatsuPuerto PrincesaNewcastle WilliamstownMutiara SisFatmwatiBabullahKomodoAenaPax (in millions) Projected Pax CAGR (2013) 5 10 15 20 25 30 350%2%4%6%8%10% Aena (187m pax) New KansaiFukuokaNiceLyonToulouseBordeauxNairobiAmmanGuararapesMactanRostovVnukovoGreece regional (Ph 1) Greece regional (Ph 2) DomodedovoSheremetyevoPrince Mohammad (S.Arabia)
Figure 4: Global pipeline airport privatisations
Figure 5: Global pipeline airport privatisations – current and projected pax growth rates
Note: Projected pax growth is based on IATA’s forecasts for the country rather than the airport specifically
Source: Various news sources, PwC analysis
Source: IATA Country forecast, PwC analysis

Other opportunities
Notwithstanding the fact that airport privatisations are likely to dominate the headlines and deal activity, airport investors’ interests should remain piqued by private investment activity. In the UK alone, London Gatwick, London City, Bournemouth, Doncaster, and Leeds Bradford airports are all expected to see transaction activity over the foreseeable future. With closed-ended infrastructure funds looking to realise value, deal volumes should stay healthy, although the proliferation of off-market deals looks set to continue. Recent examples include Ferrovial’s concurrent stake sales in Heathrow and its and Macquarie’s acquisition of Heathrow’s regional airports (Aberdeen, Southampton, and Glasgow) and Ontario Teachers’ pre-emptive acquisition of Macquarie’s stake in Bristol airport.
How has the investor market changed?
With an established infrastructure investor base ranging from private funds and publicly listed vehicles to major municipal pension funds and trading houses, airport investments have unsurprisingly also become more specialised.
Major capital-city airports will attract no shortage of pension fund and sovereign wealth bidders, whilst smaller and regional airports will attract investors who believe they can help management teams execute ambitious business plans and drive value through improved performance throughout the business.
Construction and development• Experience in airport construction projects• Value engineering• Airport planning and designFinancial investors• Experience with infrastructure investment• Able to demonstrate value-addthrough management input• Low cost of capital and accessto funds• StructuringAdvisors• Financial• Legal• Capex• Retail and other non-aero• Strategy/ business planning• Operations• Tax/accountingOperatorsCargo• Operations • Third-party logisticsPassenger/Terminal• Appropriate airport experience (e.g. size, type of operations) • Experience in development of commercial revenuesConsortium
Figure 6: Building a strong consortium
On privatisations, credible consortiums are the key to success, as governments look for a combination of price and trusted airport operators. However, coming together to execute a successful acquisition is the easy part: aligning ongoing interests between financial investors and operating parties will prove more challenging, as will giving management a clear view of the post-acquisition business plan.
Final thoughts
With no shortage of airport opportunities ahead, the market rightfully seems an attractive one to infrastructure investors, who continue to attend industry conferences in numbers.
With economic turbulence subsiding but not disappearing altogether, airport investors would be wise, however, to exercise a degree of restraint. The recent economic downturn made it abundantly clear that airports are not homogeneous assets, and not all are worth investing in, unless the price is right.
In particular, smaller and regional airports have a habit of developing winners and losers, and getting the right team on board to execute a transaction is likely to maximise chances of on-deal and post-deal success.
About the authors: Bernard Chow is a senior member of PwC’s Transaction Services Infrastructure Team, based in London
(bernard.chow@uk.pwc.com,
+44 20780 48741).
Colin Smith leads PwC’s Transaction Services Infrastructure Team in London.
Key contact for Transaction Services:
Colin Smith, Partner, PwC UK
(colin.d.smith@uk.pwc.com,
+44 (0)20 7804 9991).

Air connectivity: Why it matters and how to support growth 11
Air connectivity: Why it matters and how to support growth
Global air travel has changed considerably over the past decade. Thanks to major improvements in technology, air travel is more efficient, making distances between countries seem shorter than ever. Meanwhile, the continued growth of low cost carriers (LCCs) and their increased penetration into emerging markets has made air travel more accessible, while the rapid expansion of Middle East hub carriers has changed intercontinental travel patterns. As a result, air connectivity has also changed.
But what is air connectivity, exactly? The International Civil Aviation Organization (ICAO) defines it as an indicator of a network’s concentration and its ability to move passengers from their origin to their destination seamlessly1.
Air connectivity is key to unlocking a country’s economic growth potential, in part because it enables the country to attract business investment and human capital. An increase in air connectivity also spurs tourism, which is vital to many countries’ economic prosperity.
By understanding how air connectivity is measured, how it has changed, how it relates to economic growth, and what drives it, key aviation stakeholders (i.e. States, Airports and Airlines), can make strategic decisions on how to enable and unlock the air connectivity potential of a country.
How is air connectivity measured?
Air connectivity is measured using a variety of measures at various levels of granularity. These measures – including total passenger movements, airfares, the number of direct destinations, and travel time – can serve as standalone proxies or may be combined to create a measure capturing different features of the air-transport market. (See Figure 1.)
1 ICAO (2013), Worldwide Air Transport
Conference (ATConf/6-WP/20
Hayley Morphet and Claudia Bottini

Travellers have different priorities, depending on the purpose of their journey. That means different measures can be used to assess air connectivity for each passenger segment. For instance:
•
Business travellers tend to be time sensitive and relatively indifferent to fare levels. Frequent and flexible service that enables passengers to quickly change flights to a more convenient time, coupled with easy surface accessibility, matter most to this segment. Thus air connectivity for them could be measured by frequency of service, convenience of schedule, travel time, number of direct routes available and proximity to the city centre.
•
Leisure travellers care more about fares, with cost-effectiveness often the most important factor in decisions about whether to travel and where, especially for short breaks. An unacceptably high fare could cause them to change their mind about their destination. Measurements of air connectivity for this segment should therefore include fares.
Figure 1: Air connectivity measures
•
Direct seat capacity
•
Availability of direct flights
•
Direct destinations
•
Average daily frequency/ route
•
Convenience of schedule
•
Distance to city centre
•
Access to flexible fares
•
Travel time
•
Passenger movements
•
Average seats per movement
•
Indirect one stop destinations
•
Country GDP/GDP per capita
•
Route network concentration
•
Airline concentration
•
Route stability
•
Access to sales channels
•
Airfares
•
Availability of seats
•
Choice of destination
Business
Leisure/VFR
Note: VFR is a subset of leisure travel. However, this segment differs from leisure in that passengers don’t have a choice of destinations and appear to be less sensitive to price (price, however, may determine how frequently they travel).

•
Visiting friends and relatives passengers are travelling primarily to see loved ones. In some markets, this category of travel is substantial. Passengers travelling for this purpose tend to consider fares a major factor in determining how frequently they travel. However, unlike leisure passengers, they don’t have the option of changing their travel destinations if fares are too high.
Measure
Description
York Aviation Business Connectivity Index
Captures economic importance of destinations, measures value of connectivity to businesses
Netscan Connectivity Index
Captures seat capacity, accounts for both direct and indirect connections and for transfer time as well as potential delay time when connecting
IATA Connectivity Index
Captures the importance of destinations based on the size of the final destination airport
World Bank Air Connectivity Index
Weights value of a route based on the number of onward connections available reflecting benefits of hubs
World Economic Forum Connectivity Index
Presents data on scheduled available seat kilometres per week in 2012 for a sample of 144 countries
Table 1: Air connectivity indices in aviation economics literature
Source: Various
The importance of air connectivity has led to the development of a number of indices in aviation economics literature. (See Table 1.) Each measure aims to capture a range of factors influencing connectivity. At the same time, aviation stakeholders looking to understand the integration of country (or city) within the global air network can tailor their choice of air connectivity indices to suit their needs by identifying the criteria most important to the country (or city) they’re interested in and by developing an integrated index which takes multiple variables into account.

Note: The chart only shows international scheduled routes. Central America is defined as Central America and the Caribbean.
Source: Milanamos, PwC analysis
How has air connectivity changed?
Over the past 10 years, the aviation industry has experienced the effects of various shocks (such as terrorist attacks, natural disasters and pandemics), a weak economy and rising fuel prices. The industry has shown its resilience by adapting itself to satisfy the needs of an ever evolving market.
Air traffic growth, which was once led by North America and Europe, is now fronted by the Middle East, Asia- Pacific region and Latin America which have experienced strong growth over recent years. As reported by IATA2, in 2013 revenue passenger kilometres (RPKs)3 in North America and Europe have grown at a rate of 2.2% and 4.0% respectively. On the
Figure 2: Number of international routes by region: 2003 and 2013
+32%
+61%
+20%
+68%
+57%
+33%
+31% other hand, the Middle East, Asia- Pacific region and Latin America have shown growth rates of above 6% per annum, specifically 11.9%, 7.2% and 6.5%. Growth in Africa has also been remarkable with an increase of 5.1% in RPKs since 2012. Most of the growth can be attributed to economic growth as well as to regulatory changes which allow for greater market access.
If we consider the number of direct international routes as a proxy to measure connectivity at a regional level, we can see that a significant increase was observed by the Middle East and Asia, with Europe’s routes almost doubling since 2003 as a result of the increased penetration of low cost carriers and the subsequent increase in point to point services.
Assessing direct and connecting passengers further highlights the aggressive expansion of the Middle Eastern hubs, which experienced larger growth in passenger demand than any other region around the world. (See Figure 3.) At the same time, Europe saw strong growth in the number of direct passengers, driven mainly by the significant penetration of LCCs in that market and a subsequent increase in the number of point-to-point services. Asia, Latin America, and Africa have also shown considerable growth, as opposed to the more mature North American market, which has seen a moderate increase in the number of passenger movements.
0100020003000400050006000700080009000AfricaAsia-PacificCentral AmericaEuropeMiddle EastNorth AmericaSouth America Number of Routes 20032013
2 IATA (06/2014), Fact Sheet: Industry Statistics
3 RPKs are a common industry measure of air traffic which is calculated by multiplying the number of revenue-paying passengers aboard the vehicle by the distance travelled

How are air connectivity and economic growth linked?
Aviation generates significant benefits for the global economy. In 2012, it contributed US$2.4 trillion to the global GDP (3.4%). Direct benefits (i.e. employment and economic activity generated by the air transport industry) are estimated at about US$606 billion; indirect benefits (generated by employment and economic activity of suppliers of the air transport industry) at US$697 billion.45 Aviation also plays a key role in enabling the economic growth of countries which rely on major hubs such as Singapore and Dubai. In Dubai, for instance, aviation generates about 28% of the city’s GDP.
Therefore, we can see how improved air connectivity plays a large role in creating such economic value. Obviously, it benefits travellers by giving them access to a wider network as well as more frequent and better connected services. But it also can strengthen a country’s economy over the long haul, boosting productivity through its positive impact on businesses. For example:
•
Increased connectivity reduces air travel times, giving businesses access to a wider marketplace.
•
Increased connectivity makes it easier for managers and executives to oversee far-flung operations, which infuses efficiency into those operations.
•
Better transport linkages enable investment and human capital to flow more freely across borders, improving returns on investment for some projects.
020406020032013 Pax(M) 010020030020032013 Pax(M) Europe020406020032013 Pax(M) AfricaMiddle East010020020032013 Pax(M) Asia Pacific+98% +61% +126% +88% +110% +26% +176% +86% Growth in Connecting Pax Growth in Direct Pax 05010020032013 Pax(M) North America+65% +22% Latin America020406020032013 Pax(M) +219% +116%
Note: The figure shows the travel patterns of passengers by region. It excludes domestic traffic. Latin America is defined as South America, Central America and the Caribbean.
Source: Sabre/PlanetOptim Milanamos, PwC analysis
Figure 3: Direct and connecting passenger traffic, 2003 and 2013
4 ATAG (2014)
5 Note: other benefits generated by aviation include induced and tourism catalytic benefits which
in 2012 made up for the remaining US$1,131 billion.

With such insights in mind, PwC conducted an econometric study for the UK Airports Commission. The study used seat capacity as a proxy for air connectivity to estimate the impact of improved connectivity on the UK’s economy. The study revealed that a 10% increase in seat capacity could improve:6
•
Short-term GDP by 1%.
•
Tourism by 4% within the UK and 3% among UK tourists travelling abroad.
•
Trade by 1.7% in terms of UK product imports and 3.3% in terms of UK product exports. UK service imports and exports would also improve by 6.6% and 2.5%, respectively.
•
FDI by 4.7% in terms of increased UK FDI inflows and by 1.9% in terms of increased UK FDI outflows.
What drives air connectivity?
Four main factors enable air connectivity: geography, airport infrastructure, airline models, and a country’s regulatory and economic frameworks. These enablers all play an important role in ensuring that a country can cement or expand its global air network to enhance air connectivity.
Geography
Air connectivity is especially important to countries with isolated air-travel markets (such as islands and large geographical areas) where passengers have few viable alternatives to air travel. However, a country’s geographical location can enhance its ability to develop a well-connected network. Examples include Singapore, Hong Kong, Incheon, the Middle Eastern hubs of Dubai, Abu Dhabi, and Doha, as well as the emerging Turkish hub of Istanbul, all of which have exploited their favourable position in the global air-travel network to build strong hubs with far-reaching spokes.
If we look at Europe, Asia, and the Middle East, we can see how each of these regions has capitalised on its geographical location by capturing intra- and inter-regional flows:
•
Europe – Within a four-hour radius, the EU’s main hubs can draw mainly from European and possibly North African destinations. On longer haul routings, the EU is a convenient intermediate point for (especially) East Coast7 North American traffic to Asia.
•
Asia – Asian hubs such as Singapore and Hong Kong have traditionally enjoyed advantages with respect to traffic routes between Europe and Australasia and with respect to other points in Asia where traffic to and from Europe is less developed (such as Indonesia and Vietnam).
•
Middle East – Within a four-hour radius of Middle Eastern locations lie the eastern parts of Europe and Africa as well as the highly populous markets of the Indian subcontinent. A range of destinations fall within the scope of a 12-hour flight from Dubai, including China, Southeast Asia, Australia, and the vast majority of the African continent. However, the majority of the Americas lie just outside this radius.
Middle Eastern countries have excelled at marrying a strong national carrier with a route network that supports it by leveraging on the advantage that comes from being located at the mid-point of major traffic flows. Inter-regional transfer traffic at Middle Eastern hubs has in fact grown 15% per year in the last decade – the largest such growth in the world. (See Figure 4.) The strategy adopted by Middle Eastern countries has catalysed development of hub services, which provide passengers with benefits such as more convenient travel itineraries, more frequent flights, and a wider range of destinations available within specific flight times.
6 Airports Commission (prepared by PwC) (2013),
Econometric analysis to develop evidence on
links between aviation and the economy,
https://www.gov.uk/government/publications/
airports-commission-interim-report
7 Although West Coast North America is also within
the 12-hour radius of Europe, flights can reach
much of Asia direct in the westerly direction.

Airport infrastructure
Airports provide the connectivity and access required for a modern economy, enabling businesses to capture overseas opportunities and facilitating the coming and going of tourists – all of which fuel economic growth.
Transport infrastructure acts as a facilitator of growth unlocking latent demand. Moreover, enhancement of transport infrastructure, combined with development of an extensive network, can decrease general travel costs for passengers and goods – thanks to lower fares, shorter travel times, and more seamless connections.
Analysis of what’s happening in emerging companies can shed light on the importance of airport infrastructure for improving air connectivity to foster economic growth. For instance, some countries – such as Indonesia, India, and Brazil – have registered brisk growth in recent years (driven by increases in population and economic wealth). But inadequacies in their current airport infrastructure are preventing them from fully capitalising on their growth. Such infrastructure lacks the required capacity, but boosting that capacity will require considerable capital expenditure.
Figure 4: Intercontinental transfer traffic
7m3m6m39m52m32m42m33m4m42m10m4m20m3m+2% +4% +2% +6% +15% +5% - 20032013
Note: The chart only shows interregional transfer passengers; it excludes direct passengers between regions as well as any passengers requiring more than one connection and passengers travelling within the region. Turkey has been classified as Middle East.
Source: Milanamos, PwC analysis

In the past, LCCs have targeted mainly the leisure passenger segment. The low-cost model has traditionally provided a ‘no-frills’ service that can create demand by offering very low fares as well as by serving destinations that were previously not served or only connected via a hub. The availability of low fares has opened the market to a wider group of consumers and has enhanced connectivity by establishing services to and from secondary airports.
Point to Point(Secondary Airports) Short toMedium Haul IntlHomogenousFleetLowerFrequencyOne PassengerClassOne-Way Tari Hub SpokeNetworkDomestic, Short to Long- Haul IntlMulti-FleetHigh Frequency2-4 passengerclassesMultiple TarisavailableLCCHybridNetwork CarrierStructure ofNetworkFleetGeographicalnetwork coverageSchedulesCabin ClassFaresAlliances Loyalty ProgramsNo AlliancesSales DistributionOnline SalesAlliance/loyaltyprogramsAgents/GDS, Online Sales
Figure 5: Three airline business models
Airline business models
Airlines’ business models can directly affect air connectivity. Indeed, over the past decade, carriers have adopted new models to survive in the face of often unfavourable market conditions. Such models fall into three broad categories: low-cost carrier, network carrier, and hybrid. (See Figure 5.)
Network carriers mainly operate radial networks centred on their main base or hubs. Their networks provide a wide range of destinations and frequent and flexible services that meet the needs of both business and leisure travellers. A hub-and-spoke model consolidates traffic through a hub and allows for lower-density routes to become viable that may not have been viable as a point to point service. This helps to provide a country (or city) with important links and increased frequency of services to the global air travel network.

With the most recent global financial crisis, many business travellers have gravitated toward LCCs for short haul travel. To capture this new market, some airlines are transitioning to a hybrid model, providing reasonable fares combined with the flexible and frequent service business travellers want.
Countries that can rely on strong network carriers that use their hubs efficiently are more likely to achieve greater air connectivity than countries served only by LCCs. However, this likelihood also depends on what type of air connectivity is central to a nation’s economy; specifically, what their leisure and business travel markets want.
Regulatory and economic framework
Public policy and regulation can powerfully facilitate air connectivity – or hinder it by constraining development of a country’s air- transport network. Since the 1940s, international air services have been governed by a complex web of bilateral air services agreements (ASAs) between States. Such agreements determine the number of airlines that may compete in any given market, the routes that airlines may operate, capacity (in terms of frequency, and often the number of seats offered) that airlines may provide, and airfares. In recent years, some States have moved to liberalise ASAs; for example, through so-called ‘open skies’ agreements. Yet despite these open- access models, restrictions remain. Most notably, when it comes to ownership and control of airlines, most ASAs allow governments to reject the designation of any airline that is not owned and controlled by the designating party. For the foreseeable future, the prospect of ‘normalisation’ of air transport, particularly with respect to consolidation or cross-border mergers of airlines, remains limited.
Governments trying to decide the degree to which they want to liberalise their ASAs would generally take a number of factors into account. For example, a country’s geographic features influences the extent to which liberalisation will boost air travel and connectivity. Geography also dictates the features of a country’s air-travel market; in particular, whether it is mainly domestic market, an international market, or a transit point for global traffic flows. The attractiveness of the country to tourists and businesses also matters, with population affecting the size of the potential market. For instance, geographically isolated countries may be more likely to see liberalisation as being in their economic interest, especially if they’re not attractive to tourists or they don’t have the population density needed to build a competitive air-transport network.
Size and geographic location may also influence a government’s attitude toward liberalisation of airline ownership provisions. Unfortunately, ownership decisions can’t be made unilaterally. Countries need agreement from ALL the bilateral partners who are most significant to their markets – or they risk having airlines with foreign ownership rejected. This is a problem of growing significance for governments seeking fresh capital investment in their airlines. As former flag carriers experience distress, the need to maintain air connectivity will raise new questions about the role of public- and private-sector investment in the industry.
How can stakeholders facilitate connectivity growth?
With the exception of external factors such as geography that are beyond one’s control, stakeholders have the ability to influence many of the factors that enable achievement of greater air connectivity. For instance:
Emerging countries can achieve greater air connectivity by:
•
Focusing on the development of aviation infrastructure (such as airports) – attracting new investors and ensuring that enough capacity is created to accommodate demand.
•
Airlines need to continue establishing and building up their networks to support the linkages a country has with the rest of the world.
•
Developing regulatory and economic frameworks which reflect the characteristics and needs of the country, whilst at the same time, fostering air transport growth.
On the other hand, more mature economies will need to focus on sustaining air connectivity by:
•
Maintaining the current aviation infrastructure (such as airports) and ensuring any need for additional aviation capacity is promptly addressed to avoid loss of air connectivity to other competing neighbouring countries.
•
Airlines should continue to find new routes to enhance their network connectivity which is vital to the success of an airline. These opportunities may be found in emerging markets.
•
Mature economies should examine their regulatory and economic frameworks to see that these are continuing to enable growth.
The importance of air connectivity to a country’s economic prosperity calls for stakeholders to work together towards ensuring that the right steps are taken to improve or maintain the global position of a country (or city) within the global air network.
About the authors: Hayley Morphet and Claudia Bottini are PwC air traffic demand modelling professionals based in London. (hayley.e.morphet@uk.pwc.com,
+44 (0) 20 7804 9032 and
claudia.bottini@uk.pwc.com,
+44 (0) 20 7213 5292).

Propensity to fly in emerging economies
What do the trends mean for aviation infrastructure investment?
Executive summary
In markets around the world, changes in propensity to fly affect demand for air travel. And when future demand increases, so does the need for investment in aviation infrastructure. Many investors form their analyses on developed markets and, more recently, the BRICS – Brazil, Russia, India, China and South Africa – when crafting their infrastructure investment strategies. When it comes to emerging markets, the BRICS do call for close consideration. But there are forces at work in several other emerging markets that could present equally attractive opportunities.
Identifying investment opportunities with strong growth prospects requires an understanding of trends in the forces affecting revenue growth – which is driven primarily by passenger growth and therefore propensity to fly. In this article, we aim to build that understanding. Using forecasting and modelling and drawing on our industry and sector knowledge, we analyse how propensity to fly may shift in various emerging markets in the coming decades – and where the most promising investment opportunities may lie in the future.
What influences propensity to fly?
In any given market, propensity to fly (number of air trips per capita) strongly determines future demand for air travel among business and leisure travellers. The faster the future demand growth, the more urgent the need for safe and efficient airports, reliable transportation and communication networks around airports, and other forms of aviation infrastructure. And the more urgent the infrastructure need, the more opportunities investors have. So understanding how propensity to fly might change in various markets can help investors anticipate where the best opportunities may arise in the future.
But propensity to fly is affected by a lot of different, interrelated forces. An economy’s health (and therefore its personal income levels), demographic changes, and the affordability of air travel are just a few examples. To identify the most promising opportunities for aviation infrastructure investing, investors must understand how those forces are changing within particular markets and compare their findings across markets. Many investors are already basing their investment strategies at least in part on their analysis of the aviation markets of the BRICS. But as we’ll see, that same configuration of markets may not necessarily present the best opportunities in the future.
Hayley Morphet and Claudia Bottini
The more urgent the infrastructure need, the more opportunities investors have.
:

21
Propensity to fly in emerging economies
With that in mind, let’s take a look at the forces affecting propensity to fly. We’ll then compare how the most powerful of these forces are changing in several markets. And we’ll consider what our analysis suggests about investment opportunities.
Our analysis
We analysed trends in aviation markets around the globe, with an eye toward determining where the best investment opportunities might arise in the near and long term. Our analysis focused on two factors: compound annual growth rates (CAGR) and correlations between per-capita GDP and number of air trips per capita, taking into account the various factors discussed above.
Growth in number of air passengers
When it comes to growth in number of air passengers, our analysis of the developed world presented no surprises. Propensity to fly has been increasing rapidly in Europe, owing to deregulation of the airline industry and the increased competition and consumer benefits that have ensued. But it will probably slow in the medium to long term, after the effects of deregulation have worn off and the market has reached a point of saturation. The US has already experienced this pattern.
It’s the rapidly developing markets – particularly newly industrialised economies2 like Brazil, China, India, Indonesia, the Philippines, and Turkey – that are seeing the biggest jumps in the number of air passengers. (See Figure 1.) These countries enjoyed CAGRs of 5-13% between 2007 and 2012.3
Factors affecting propensity to fly
•
Economic health. Propensity to fly goes up when people have enough personal income to afford vacations and when growth in the overall economy reflects growth in business and therefore the need for business trips. Having enough money for travel requires a strong economy reflected in healthy growth in gross domestic product (GDP).
•
Demographic changes. A growing population can increase propensity to fly merely by raising the number of people living within a particular economy. An expanding middle class can boost propensity as well, as more and more people have the incomes needed to afford air travel.
•
Market maturity. As with demographic changes, propensity to fly doesn’t increase indefinitely as an economy grows.1 In fact, it tapers off as a market matures and approaches saturation.
•
Crises. Unexpected crises, such as the 9/11 terrorist attacks and the global financial crisis in Europe, can temporarily decrease propensity to fly. Following the crisis, propensity can revive strongly in a kind of catching-up pattern after several years of suppressed growth.
•
Geographical features. Propensity to fly is greater within island nations, countries that are relatively isolated with limited land transport and large distances between population centres, and countries with a long, thin shape, which makes even high-speed rail a challenging option for travel.
•
Competition. The rise of a new business model in a market – such as low-cost carriers (LCCs) – can increase propensity to fly if it makes air travel more affordable or appealing for consumers and businesspeople.
•
Airport hub status. Countries with air connectivity far out of proportion to their size, because of their airports’ hub status, have a higher propensity to fly owing to the availability of air services. Singapore and the United Arab Emirates are good examples of this.
1 There’s still a limit to how many trips a person can reasonably take in a year, given work and
personal commitments. So demographic changes can’t raise propensity to fly indefinitely.
2 As defined by the International Monetary Fund.
3 IATA 2007–12 – International traffic only.

20% 15 to 20% 0% No data0 to 5% 5 to 10% 10 to 15% Latin America4.5% Europe3.9% Africa5.3% Middle East6.3% Asia Pacific5.7% North America3.6% IATAForecast Passenger CAGR2013-2017CAGR 2007 – 2012
Figure 1: Growth in Air Passengers
Note: Shaded countries represent historical CAGRs for international air passenger traffic. Bubbles represent regional forecast CAGRS.
Source: IATA, PwC
Correlations between per-capita GDP and number of air trips
In addition to analysing growth in the number of air passengers, we looked at the relationship between per-capita GDP and number of air trips. But we qualified this analysis in several ways. For instance, we based our calculations on the number of one-way passengers with the point of sale in a particular country.4 This approach takes out the impact of disparity between inbound and outbound passengers. Countries with a lot of inbound tourism and a low local resident population show a much higher number of trips per capita, driven by the economies of the inbound countries. So to keep things simple, we considered only resident travel patterns in our analysis.
For nearly 200 countries, we plotted per-capita GDP against per-capita number of trips. Collectively, the countries we analysed account for 97% of passenger trips captured in Sabre’s airport data intelligence database.5 Drawing on the data, we developed a relationship between propensity to fly and per-capita GDP. We took into account market saturation, assuming 2–2.5 trips per capita for non-isolated markets (countries where alternative transport modes are available) and more than twice that for isolated markets (for example, small island nations, countries where other travel modes are not available or competitive, or countries with major air hubs creating an inflated air travel market due to connectivity). Figure 2 shows that as GDP increases, propensity to fly increases. It also suggests that propensity to fly reaches saturation as GDP rises.
4 We excluded countries for which economic data was unavailable as well as nations that have low levels of outbound travel
because of political or social restrictions. Likewise, we didn’t include countries that have a disproportionate share of outbound
passengers and that have incomplete point-of-sale or point-of-origin data.
5 Though airfares and exchange rates also contribute to the number of trips a person takes, it wasn’t feasible to gather this level
of detail for each country. For this reason, our analysis doesn’t reflect these fares and rates.

Propensity to fly in emerging economies 23
Trips per capita GDP per capita - 0.5 0.0 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 - 20,000 40,000 60,000 80,000 100,000 120,000 140,000IsolatedNon-isolated
Figure 2: Relationship between air trips per capita and GDP per capita, 2013
Source: BMI, Sabre Air Transport Intelligence, PwC analysis
6 Based on real GDP per capita and population forecasts from Global Insight (August 2014).
Resident trips per country
We used the relationships derived for isolated and non-isolated markets from the data in Figure 2 to forecast growth in resident trips for 2020 for each country in our study, given growth in per-capita GDP and population over the coming three decades.6 We then compared these forecasts to resident trips for each country in 2013 and considered how the top 20 rankings might change by 2020. (See Table 1.)

Table 1: Resident trips, 2013 versus 2020
Note: These figures represent unconstrained (for example, capacity and regulation) forecasts based on 7-year forecast GDP and population projections from BMI. These figures represent indicative air-traffic growth figures based on assumptions and analysis outlined in this paper. No reliance should be placed on
these forecasts.
Source: Sabre Airport Data Intelligence, BMI, PwC analysis
Potential investment hot spots
The upshot of our analysis is that the ranking within the top 20 countries by air trips will change over the coming decade. Our findings suggest that Indonesia, Australia, the Philippines, and Russia will move up most in the ranks in terms of resident air trips. Indonesia is expected to overtake the UK and become the fifth-largest air travel market globally. On the other hand, a recent slow-down in GDP growth sees India losing ground to countries such as Australia and Indonesia. In the following paragraphs, we discuss a selection of markets that present varying levels of opportunity.
China
To capitalise on forecast growth, the Chinese government is making significant investments to upgrade aviation infrastructure. For instance, mainland China currently has 182 commercial airports. According to the ‘Twelfth Five-Year’ Plan on Civil Aviation Development, by 2015 there will be 82 new construction airports and 101 reconstruction and expansion airports. This is likely to affect investment in infrastructure construction, set as an emphasis investment channel, it is predicted that the fixed investment size will reach more than 400 billion Yuan pre-2015, 60% over the ‘Eleventh Five-Year’ period. By 2030, the number of airports in the country is expected to reach 300.
Indonesia
Indonesia is currently the world’s largest archipelago and biggest aviation market in the ASEAN group of nations. With a population of over 250 million and the fastest growing economy in Southeast Asia, Indonesia desperately needs additional aviation capacity and infrastructure.
A wide range of opportunities for investment in infrastructure is available. Thirteen airports have been listed for expansion and refurbishment programs, as outlined in the Masterplan for Acceleration and Expansion of Indonesia Economic Development (2011-2025). Additional opportunities lie in the refurbishment of air traffic control assets and ground handling, where the demand for new
Ranking
Country (2013)
Resident Trips (m) (2013)
Country (2020)
Resident Trips (m) (2020)
Ranking Change
1
United States
592
United States
636
–
2
China
372
China
525
–
3
Japan
138
Japan
145
–
4
United Kingdom
98
Brazil
118
1
5
Brazil
96
Indonesia
117
3
6
Germany
81
United Kingdom
115
(2)
7
India
77
Australia
92
2
8
Indonesia
77
India
89
(1)
9
Australia
77
Germany
85
(3)
10
Spain
72
Spain
83
–
11
France
64
France
68
–
12
Canada
59
Russia
68
2
13
Italy
59
Canada
65
(1)
14
Russia
54
Italy
62
(1)
15
Turkey
43
Turkey
57
–
16
South Korea
36
South Korea
51
–
17
Mexico
36
Mexico
47
–
18
Malaysia
33
Malaysia
45
–
19
Thailand
32
Philippines
41
2
20
Saudi Arabia
29
Thailand
38
(1)

equipment will be considerable. Investments by domestic and foreign parties are fully supported by the government in a bid to spur growth.
The operator of Indonesia’s Soekarno- Hatta International Airport in Jakarta, the nation’s capital, is committing the equivalent of US$1.24 billion to bring the airport up to date and on par with other major global airports. Soekarno- Hatta was built in 1985. In 2013, it was the world’s 10th busiest airport. It’s become so overcrowded that it experiences major flight delays at peak travel times, and passengers can expect to wait as long as an hour to claim their luggage after touching down at the airport. The area around the airport has even more problems, including telecommunications difficulties and blackouts. The airport upgrade, which kicked off in August 2012, will be carried out in phases and calls for a new terminal and an extra runway to be completed by 2015.
In addition to development of Soekarno-Hatta, other major airports including Ngurah Rai are currently undergoing major expansion programmes. Whilst existing airport improvements are underway, an entirely new site has been constructed in Medan, about 900 miles north of Jakarta. The New Medan International Airport (Kuala Namu), which with a capacity of 8.1 million passengers per year is the second largest after Soekarno-Hatta International, opened this year in late July. It replaces the existing international airport (Polonia). Airside facilities are controlled by the Indonesian government, and landside facilities are owned by a joint venture with PT Angkasa Pura II,7 which is expected to provide US$350 million as an initial investment in return for a 30-year lease. After the lease expires, ownership will revert to PT Angkasa Pura II. The Medan site is to serve as a
7 PT Angkasa Pura II is state enterprise of the Indonesian Department of Transport that is responsible for
the management of airports and air traffic services in Indonesia. regional hub at the same level as Singapore’s Changi and Bangkok’s Suvarnabhumi airports.
Saudi Arabia
Saudi Arabia has four international and 26 domestic/regional airports. The Kingdom, which is heavily reliant on air travel, is investing significantly in infrastructure projects to accommodate future growth and help to transform Saudi Arabia into an important hub for east-west routes. In 2010, the General Authority of Civil Aviation of Saudi Arabia (GACA) estimated that over the next 20 years, the government will commit at least US$5.3 billion in the development and revamping of airports. The Saudi market is opening up to foreign investors, as evidenced by foreign organisations managing three of the four international airports in the country.
A consortium led by the Turkish group TAV Airports was awarded the build- operate-transfer contract for Prince Mohammad Bin Abdulaziz International Airport in Medina in October 2011, making it the first airport privatisation deal in Saudi Arabia. The agreement was made between the GACA and TAV alongside partners Al Rahji and Saudi Oger. The consortium will construct a new passenger terminal by the first half of 2015, and will operate the airport for 25 years.
There is private sector involvement in Saudi Arabia’s three major international airports in Riyadh, Jeddah, and Dammam. Fraport Saudia Arabia Ltd (a 100% subsidiary of Fraport AG) is responsible for the management, operation, and further development of the King Abdulaziz International Airport in Jeddah and the King Khalid International Airport in Riyadh. Changi Airports International (a 100% subsidiary of Changi Airports Group) manages King Fahd International Airport in Dammam.
A second tranche of Islamic bonds worth SR15.2 billion (US$4.05 billion) was issued to further finance the expansion projects of King Abdulaziz International Airport (KAIA) in Jeddah and King Khalid International Airport (KKIA) in Riyadh.
The Philippines
The Philippines government announced a Php 303 million
(US$7.3 million) project to construct, improve, and expand airports in San Vicente, Pagadian City, Butuan City, Dipolog City, Sanga-Sanga, Tawi-Tawi, Cotabato City, and Maasin. In June 2012, the Department of Transportation and Communications (DOTC) invited local and foreign firms to bid for contracts to expand and improve the passenger and airport traffic handling capacity of these eight provincial airports. In 2014 both the US Federal Aviation Administration and the European Union upgraded aviation safety ratings for the Philippines, providing further scope for expansion of international services and further driving the need for expansion in airports and airport infrastructure.
Amongst ongoing projects is the upgrade of Tacloban Airport, for which a budget of Php 2.12 billion
(US$49 million) was approved by DOTC (additional budget, however, may be required for its completion). Following the damage caused by Typhoon Yolanda in November 2013, a runway rehabilitation programme was launched at the airport. During the first phase of the programme, major terminal renovations are being undertaken, while during the second phase, the Civil Aviation Authority of the Philippines (CAAP) will oversee interior redevelopment works and amenity repairs.

Close-to-capacity facilities at Cebu Airport have also called for the government to tender an upgrade plan for the construction of a new passenger terminal building and the expansion of the existing one. This will increase Cebu Airport’s capacity from 4.5 million passengers per year to 8 million per year.
Furthermore, a US$79.41 million design and build contract for the upgrade and expansion of Puerto Princesa Airport (DOTC) was put to tender in August 2014. The cost of the project was supported by the Export- Import Bank of Korea, from which the Philippines government received a
US$71.6 million loan.
India
Despite the recent slowing of the economy, India remains one of the 10 largest markets globally. The growth in the aviation sector in India requires significant updating of outdated airport infrastructure. There are currently 454 airports and airstrips in India, 16 of them designated as international airports. The Airports Authority of India (AAI) owns and operates 97 airports. India’s government allows for domestic and foreign investors to participate in the development of airport infrastructure at selected airports. In 2013 the limit by which foreign investors can invest in Indian companies was increased to 49% in the aviation market. The government passed a legislative amendment in 2003 allowing the private sector to enter the field of airport development and permitting 100% foreign direct investment for greenfield airports. A number of other airports have been granted approval to be constructed and financed through public-private partnerships (PPPs).
Given the need to enhance connectivity, the government is planning to build 51 airports over the next few years. Of these, 15 are low-cost airports with construction kicking off in 2013. The investment envisaged for the airports sector is
US$12.1 billion, of which
US$9.3 billion is expected to come from the private sector. These investments will be used for a wide range of infrastructure projects, including the construction of new airports, the expansion and upgrade of existing airports, and the development of low-cost airports. The development of world-class ground handling, cargo, and logistic facilities including high-output distribution centers at major airports, is also expected to require a very significant investment.
Of India’s 454 airports, the majority are in Tier 2 and Tier 3 cities. These airports are too small to attract foreign concessionaire interest.
As a result, the government has announced during the recent 2014 budget the creation of 200 low-cost airports in such towns and cities to ensure appropriate connectivity, to be funded through PPPs.
In addition, the greenfield international airports at Bangalore and Hyderabad were constructed with financing through PPPs with significant shares of foreign investment. In fact, PPPs enabled modernisation and expansion of the Delhi and Mumbai airports through a transparent competitive bidding process. Other major airports such as Chennai and Kolkata will likely also be modernised through PPPs.
Russia
Strong economic growth is predicted for Russia in the short term. Demand for air travel is set to increase as a result of a growing middle class with willingness to diversify consumption behaviour increasing their propensity to fly.
Russia has 315 airports, of which 64 urgently need upgrades. Most of the airports requiring refurbishment are located in areas where air travel is the only mode of transport available. The government has been injecting cash into regional airports in a bid to attract private investors. However, owing to the size of the airports (often smaller than 1 million passengers per annum), this has been quite difficult.
With Russia hosting the 2018 FIFA World Cup, major development plans are expected for Russian airports, representing an opportunity for investment. One example of such development has been initiated at Moscow’s Sheremetyevo airport, where plans aim to raise passenger capacity to 53 million by 2017 and include significant infrastructure investment in sub-runway inter- terminal passenger and luggage tunnels.
The growth in the aviation sector in India requires significant updating of outdated airport infrastructure.

Brazil
Many of Brazil’s major airports are currently capacity constrained and require upgrading and expansion. Future performance of Brazil’s airports is critical, particularly because of the Olympics in 2016 in Rio de Janeiro. In 2011, the government of Brazil decided that private companies would be granted a concession to commercially run some of Infraero’s8 airports to implement upgrades to airport facilities and infrastructure. Current legislation in Brazil does not allow the sale of airport infrastructure; however, the government can grant concessions or perpetual franchises to the private sector for airport operations. The concessions are taking the form of PPPs in which the concessionaire would own 51% of the shares and Infraero would own 49%, therefore holding veto rights on strategic decisions in the joint ventures. In 2012, the semi-privatisation of three of the largest airports in the country, namely, Viracopos International Airport in Campinas, Guarulhos International Airport, and Brasilia International Airport, started to occur, with these airports being auctioned to a consortium of private firms. Galeão International Airport in Rio de Janeiro and Confins International Airport in Belo Horizonte are also set to be partially privatised in a second round of concessions occurring later this year. Infraero has also been investing in facility improvements at these two airports.
Additional potential is identified in retail expansion. In 2011, non- aeronautical revenue accounted for about 32% of total airport revenue, suggesting potential scope for maximising revenue generated through retail. With traffic volumes expected to increase significantly in Brazil over the next 10 years, Brazilian airports will likely remain attractive to investors.
Turkey
The Turkish economy has grown robustly over the last decade, and its air transport services have developed exceptionally as both its airlines and its infrastructure have modernised successfully. The number of visitors to Turkey increased at an average annual rate of over 10% over the last decade and Turkey saw a huge increase in resident trips due to strong economic growth. New airport infrastructure and Turkish Airlines’ aggressive growth have helped drive this development. There has been increased private- sector involvement in airport development since the government enacted a law on the realisation of certain investments and services in the Build-Operate-Transfer (BOT) model in 1994. Such development has focused primarily on Antalya, Istanbul-Ataturk, Izmir-Adnan Menderes, Dalaman, and Milas-Bodrium airports. Turkish operator TAV holdings is the largest airport operator in Turkey and operates airports abroad.
Construction has commenced at a third airport with a final passenger handling capacity of 150 million per year, the largest in the world, in Istanbul, with the goal of replacing Ataturk Airport. The project was contracted using the BOT model. The 25-year tender was auctioned off for euro 22 billion (US$31 billion) in May to a consortium of five Turkish companies.
8 Infraero is responsible for operating Brazil’s main commercial airports.
9 CAPA: http://centreforaviation.com/analysis/japans-expanding-lccs-drive-growth-but-need-cultivating-
spring-airlines-and-airasia-re-entry-loom-160039
Development programs for Turkey’s busiest airport, Ataturk, has commenced with initial expansion of aircraft standing and parking facilities. Work at Sabiha Gökçen Airport is also underway in a bid to provide for additional aviation capacity.
Japan
Air traffic growth in Japan is slowing because of Japan’s aging population. The resulting decline in population, coupled with slow real growth in GDP, means that propensity to fly needs to work even harder for Japan’s air travel market to continue to grow and keep up with other markets. LCCs are beginning to have a presence at Japanese airports, potentially leading to stiffer competition and lower fares, which could increase propensity to fly. This is evidenced by market share claimed by domestic Japanese LCCs, which increased from 17% to 24% of domestic capacity carried between Q4 2013 and Q1 2014.9 Despite modest growth expectations, Japan still presents an opportunity for investors, as the Japanese government has announced plans to concession up to 27 airports between 2014 and 2019, with New Kansai and Osaka airports opening for concession bidding in 2014. In parallel, the state of Hokkaido has also expressed interest in concessioning its 11 airports. Japanese airports present significant commercial opportunities, as this area has previously been underexploited.
Japanese airports present significant commercial opportunities.

Considerations for investors
We have outlined several emerging markets that will see a major increase in propensity to fly by 2020. Each of these markets needs significant infrastructure upgrading. Such investment may unlock significant economic benefits for a city (or country), supporting an increase in air connectivity through better and more efficient infrastructure. In making investment decisions, investors will want to take into account these markets’ unique characteristics, including the regulatory environment and the changing global aviation landscape.
For example, China will see a big jump in air-traffic growth, and (as we noted above) its government plans to invest heavily in beefing up aviation infrastructure. The government is also initiating reforms to raise income levels – including increasing the minimum wage 40% by 2015, expanding the social welfare and health-care system, and promoting labour-intensive service industries. These moves could boost consumption as a percentage of GDP growth. All this suggests that China may represent a good opportunity for investment. But owing to regulations restricting foreign investment, the door isn’t necessarily open for outside investors. By contrast, the Indian government allows foreigners to invest significantly in Indian companies, and prospects look good for foreign direct investment in greenfield airport developments. Thus India’s aviation infrastructure may constitute a much better opportunity, at least in the medium term.
Here’s another consideration: Developed economies’ aviation markets might not look like worthy investment targets because of market maturity and the influx of new competitors from the Middle East, Turkey, and other emerging economies. But that’s a surface-level view of the situation. Our analysis shows that these new competitors won’t necessarily pose a threat to developed economies in terms of taking away market share. They could actually present an opportunity – for mature markets and investors alike. Why? Their presence will create more inter-airport connections and thus increase cross-border networks. Aviation infrastructure will expand as a result, opening up new opportunities for investors in developed and developing markets.
Next steps
By understanding trends in the forces affecting propensity to fly and comparing these trends across aviation markets, investors can gain critical insights into where the most promising opportunities may arise in the future. Our analysis suggests that while the US, Europe, and BRICS still merit consideration, a number of additional markets – notably Indonesia and the Philippines – may offer equally attractive potential in the future and thus bear watching. To be sure, other factors – particularly restrictions on foreign investment and appetite for private-sector participation – also play an important role in decisions about where to focus investment. However, propensity to fly can provide some useful insights into a market’s potential in the longer term.
About the authors: Hayley Morphet and Claudia Bottini are PwC air traffic demand modelling professionals based in London. (hayley.e.morphet@uk.pwc.com,
+44 (0) 20 7804 9032 and
claudia.bottini@uk.pwc.com,
+44 (0) 20 7213 5292).

Keeping airport projects on course in a turbulent world 29
Many airport developers fail to establish the proper controls over their projects.
Keeping airport projects on course in a turbulent world
The developers of airport construction projects on the ground are much like the air traffic controllers managing flights in the sky. They both use modern systems to make sense of the large volumes of data required to keep track of so many moving parts. They still require experience and judgement to make the right decisions in response to minute-by-minute fluctuations and the large-scale disruptions brought by external factors. They need to be ever vigilant and highly flexible to respond to fast-changing conditions. Those traits can save airport developments from flying too far off course, resulting in major delays, cost overruns, and project disputes.
Developers are wise to plan for all these, setting a course secure in the knowledge that they will be able to respond to events and navigate the inevitable turbulence on the way. By embracing flexibility at all stages of the project, they can shape their asset to deliver the value they are looking for, while adapting to present and future market trends.
Pierre-Edouard Pichot and Richard Scott
Unfortunately, many airport developers fail to establish the proper controls over their projects and are thus blind to troubles building on the horizon. They do not fully understand the risks and do not manage them effectively. They miss their chance to avoid disruption by taking early evasive action, and they appear unprepared when struck by events. Without contingency plans, they need a long time to respond. Often, they don’t realise the severity of delays and cost overruns until the project is facing serious difficulties.
External factors to consider in airport investment
This is a volatile time for air travel. It is difficult to predict accurately the volume of air travel and passengers’ needs 10 years or 20 years into the future. During the construction phase, airports may have to adapt to changes in their mix of airlines, the size and shape of jet planes, and the rapid advance of technology that can affect airport operations as well as passenger behaviours.
Moreover, a particular airport could suddenly face political instability and see a sharp drop in passengers in the midst of a major expansion. Airport developments tend to be highly politically sensitive and attract media attention.

The risks of veering off course are greater for airports than most big- budget infrastructure projects. Investors willing to put their money into major airport infrastructure need to recognise that such complex efforts are much more than a construction project, where most of the risks can be managed through appropriate procurement, contractual arrangements, and careful planning of the delivery.
As much as possible, investors and project owners should consider external factors that will affect the completed airport. For example, sensitivity of the project to issues such as the home country’s GDP and fuel price fluctuations should be factored in during project planning because they could have a major impact on the viability of the project’s business case.
It’s impossible to plan for unexpected geopolitical risks that could affect trends in the aviation market and industry, but project developers should be ready to make as many adaptations as possible during the construction process. A major devastating event such as the terrorist bombings of the World Trade Center and Pentagon in 2001 and the global financial crisis in 2008 can sharply change air travel patterns and affect airport projects. More recently, the Ukraine-Russian conflict has caused some airlines to alter their flight paths to avoid the fate that befell a Malaysian Airlines jet that was shot down.
Indeed, highly rated Malaysia Airlines, as well as the country’s airports, could suffer from public perception, which has suddenly turned quite negative through no ‘apparent or proven’ fault of the airline or airports.
Malaysia Airlines could face serious financial problems, which may affect the success of Kuala Lumpur International Airport and other Malaysian airports. But there’s little investors can do to plan for such dramatic developments.
Setting direction with confidence: The business case
Rigorous scrutiny of the business case provides confidence that an airport is investing in the right project. In developing the business case, investors and airport owners should identify the value they expect, how it is going to be realised, and what the risks are to that value. They should be inquisitive and test the fundamental assumptions and forecasts on which the business case is constructed. They will also need to recognise that the case could be sensitive to factors beyond their control. Once the project is initiated, they should focus on the areas where they can influence the outcome.
With any type of project, the greater the uncertainty about demand and other factors, the greater the risks will be. Given the volatility of air transportation these days, the outlook can be particularly cloudy and add even more uncertainty to an already complex project. So, it’s essential that investors and airport owners devote the necessary time and engage with the airport’s stakeholders, including regulators, airlines, suppliers, and operators, to help build a business case that’s robust and flexible enough to adapt to a future shift in trends, including external factors where they have little control.
Of course, a key factor affecting the business case of any airport is passenger demand. Assumptions and projections need to be tested with various scenarios to validate model projections. Unfortunately, some project owners and investors fail to spend the necessary time to do thorough enough research and consider all of the potential scenarios.
For example, Ciudad Real Central Airport in Spain missed the mark in its projected passenger traffic numbers. The airport opened in 2009 and was intended to accommodate 600,000 passengers annually, providing international service to Madrid via a high-speed rail connection. But the airport attracted only 53,000 passengers during its first year and never reached anywhere near the anticipated capacity, losing several airlines’ business and ceasing operations in April 2012.
What went wrong? The airport owners miscalculated a variety of things. The new airport was intended to offer competing service to capacity- constrained Madrid Barajas, but Madrid Barajas’ fourth terminal construction project reduced the constraint and hence the reason for Ciudad Real Central Airport’s existence.
A key factor affecting the business case of any airport is passenger demand.

Keeping airport projects on course in a turbulent world 31
Preparing to do the project right – and planning for inevitable changes
Airport projects are especially complex because they involve such a wide variety of stakeholders and revenue sources. Airport developments also are typically very large in scope and have a long timeline from planning to completion, increasing the likelihood of design and other changes along the way.
Many international airports are intended to be architectural statements in addition to transportation infrastructure. This has been a particular trend in airports constructed in the Middle East. Such unique designs may draw attention, but there can be a tension between form and function, and they are more vulnerable to problems in design and construction because they’ve never been done before.
A significant challenge for an airport investor is to select a delivery model that allows the transfer of some delivery risks to specialist third parties (designers, contractors, operators), while retaining the ability to respond to changes in the constantly evolving aviation industry. A compromise is often required where the owner retains significant levels of risk and must actively participate in project delivery.
Complexity, novelty, and susceptibility to change are all factors seen in airport projects. Successful airport development therefore demands the highest standards in project management and control. The delivery organisation and processes need to be carefully planned from the outset to create proper oversight, communication, and control. Significant issues need to be identified and escalated so that action can be taken quickly when risks of delay and cost overrun surface. This increases the likelihood that an airport development effort will stay on course and be flexible enough to respond to any turbulence.
Getting projects back on track
Scope change is the one sure thing to count on with an airport construction project. Airport operators need to embed flexibility in their plans. They should agree up front with designers, contractors, and stakeholders that there will most likely be changes along the way because of fluctuating market trends. They must be prepared to reassess the business case frequently to take advantage of the opportunities that change brings as well as mitigate the risks.
London’s Heathrow Airport designed its new Terminal 2 to be a home for the Star Alliance airlines and reduce transfer times to improve the passenger experience. But during construction, some of the fundamental assumptions of the terminal operation were tested by the sale of BMI, the carrier with the largest presence in the terminal, and its integration into British Airways. Fortunately, strong project controls allowed changes to be made even late in the construction programme to accommodate a new mix of carriers – within the budget and without affecting the opening date.
Airport developers must identify risks, assign them appropriately, set up controls for their own risks, and monitor the risks they have transferred to contractors or other parties. Where risks or new requirements materialise, integrating teams with representatives of all key stakeholder groups can help project leaders respond in a considered manner, balancing immediate action with the need to maintain the momentum of project delivery.
Changes in the midst of construction, of course, are much more expensive than incorporating the features in the original design. Qatar’s new Hamad International Airport was delayed in part because of changes and expansion. The Associated Press estimated that the price tag had grown to at least US$15 billion by the time the airport opened for business in 2014.
Airport developers need to evaluate any project changes and approve only those they consider truly necessary. If they decide they need a larger airport as they proceed because of changing market conditions, they must closely examine the implications for revenue, maintenance costs, and other expenses.
The contractor and designer should be given adequate time to come up with the most appropriate response. The solution chosen might not be the most economical, but it may be the most efficient to respond to the future, maximising the value to be delivered by the project in the long term. A successful delivery plan will allocate power to the right people to make the right decisions with a long-term objective in mind.
Airport operators need to embed flexibility in their plans.

To minimise expenses, airport designers are advised to build in as much flexibility as possible. If they use modular design, they can move or knock down walls to change configurations. Such a simple adjustment could provide more room for baggage claim, for instance, if passenger traffic suddenly rises and there is need to take space away from another area, such as duty-free shops. Flexible design also could allow terminals to more quickly add parking slots for planes or make modifications to accommodate larger or smaller planes.
Learning from the past
While successful delivery of modern, complex projects is supported by powerful data analysis and systems, experience is irreplaceable. Some airport owners have learned from mistakes to keep future projects on course. For instance, London’s Heathrow Airport and British Airways experienced multiple problems with their Terminal 5 opening, but Terminal 2 had a much more successful opening a few years later.
Among other things, Heathrow and British Airways failed to do adequate testing before opening Terminal 5, resulting in numerous problems. The airport and airline were also too ambitious in trying to open on Day 1 at near-full capacity. On opening day, 34 flights were cancelled and baggage check-in was suspended. On the second day, 42,000 bags were not shipped with their owners. Within five days of opening, more than 300 flights were cancelled.
Six years later, when planning the opening of the new Terminal 2, Heathrow’s owners made several operational decisions to make the opening as smooth as possible. While Terminal 5 opened at near-full capacity, Terminal 2 opened operating at 10% capacity with only 34 flights on the first day. And unlike Terminal 5’s plans to move British Airways’ operations to the terminal very quickly, Terminal 2 housed only one Star Alliance airline on opening: United Airlines, with Aer Lingus, Air Canada, Lufthansa, and other carriers moving operations over during the remainder of 2014.
The importance of getting airport projects just right
An airport is usually a landmark for a region, a country, or a continent. It is the first point of entry to a new territory, a true gateway to a new culture – and first impressions last.
So, it’s critical to try to get airport projects right despite the uncertainties of today’s air travel environment and the complexities of such projects. How many passengers complain about queues at customs or time to walk to the gate? And this is the first memory of their trip.
Such issues could easily be resolved with adequate planning and project management. Designing and constructing airports require careful long-term thinking and integrated planning with flexibility embedded at all stages of the project.
It’s critical to try to get airport projects right despite the uncertainties of today’s air travel environment and the complexities of such projects.
Pierre-Edouard Pichot and Richard Scott are based in London’s PwC UK Capital Project Services team. With significant industry experience in the management of procurement, design, development and delivery of large construction projects, they advise both owners and suppliers on delivery risks, project controls and commercial issues associated with implementing large capital projects.
Contacts: Pierre-Edouard Pichot
(pierre-edouard.pichot@uk.pwc.com; +44 (0) 7725 63 2531), Richard Scott (richard.p.x.scott@uk.pwc.com;
+44 (0)7808 105985).

Airport infrastructure in Asia 33
Executive summary
Asia’s rapid growth in the commercial aviation sector in recent decades has positioned the region as the largest and fastest growing in the world. The growth in Asia is expected to remain resilient, forecast to continue as the world’s highest growth region well beyond 20201. However, aviation infrastructure is not keeping pace with this growth. Many of the Asian hubs are already operating above their planned capacity, resulting in a rapid escalation of delays since 2010. Current plans for constructing mega- hub airports are not effective from a cost perspective and will fail to keep up with demand. Instead, governments should plan larger numbers of medium-sized airports to keep costs manageable, gain maximum operational efficiency, and build a wider aviation network, allowing Asian commercial aviation to continue in its role as a key enabler of economic growth.
Airport operators and governments in Asia are competing to build the world’s biggest airport, with capacities well in excess of 100 million passengers per annum. However, our experience is
Airport infrastructure in Asia
Coping with the demand surge
Edward Clayton
The growth in Asia is expected to remain resilient, forecast to continue as the world’s highest growth region well beyond 2020. that owing to exponentially increasing complexity, airports suffer from significant diseconomies of scale above around 50 million passengers per annum, both for the airport operator (Capex and Opex) and for the airlines and passengers using them (time to move around the airport). At the same time, the network benefits of these very large airports do not increase as fast as their size. Therefore, Asian airport planners and operators will need to acquire capabilities in multi-airport systems – or radically change how airports operate to overcome the inherent scale diseconomies of mega-hubs.
Asia as a high-growth region
In recent decades, Asia has emerged as the leading region in aviation traffic, currently accounting for 30% of the world’s revenue passenger kilometres, up from 24% in 2004. As the world’s fastest growing region, Asia should
see its growth remain resilient at over 6% per annum over the next two decades1. In contrast, established regions such as Europe and North America are expected to experience relatively slower growth, with opportunities scarce due to market maturity, environmental concerns, and increasing availability of substitutes such as high-speed rail.
1 IATA

Asia’s surge in demand for airport infrastructure is explained by three factors: liberalisation of the Asian markets, growth in wealth and size of the Asian middle class, and a lack of alternative modes of transport.
Since the 1980s, the opening of formerly closed countries in Asia to global trade has massively stimulated the movement of both goods and people in the region. Free trade agreements (FTAs) have driven the convergence and integration of economies within Asia, stimulating intra-regional trade. Concurrently, Asian countries have liberalised visa requirements and air travel agreements. For example, the ongoing programme of ASEAN air services liberalisation has already resulted in significant increases in flights between capital cities, and should enable the opening up of many secondary airports to intra-ASEAN flights in 2015.
In combination, the liberalisation of Asian economies and travel restrictions has opened travel opportunities to new population segments, many of which were previously unable to travel by air.
Asia already has the largest share of the world’s urban population in its cities; this is unleashing a massive wave of new travel. The reasons are simple: people migrate to centres where they can earn higher wages; they can then travel owing due to the availability of airport infrastructure in proximity to such cities. They also have the motivation to do so, in many cases for visits to their home towns but also for tourism. Asia is rapidly becoming a higher income region, and is already home to 41% of the world’s middle class. This percentage is predicted to rise to 68% of the world’s middle class in 2033, owing to an expected four-fold increase in absolute numbers of Asia’s current middle-class population.
Empirical evidence shows that the propensity to travel increases with the economic well-being of the country. (See Figure 1.) However, upon further inspection, the trend points toward an even more compelling case for the growth of air travel in Asia. At similar levels of economic well-being, Asians take more trips than the Europeans and North Americans who adopted mass air transport far earlier than Asians.
One reason for this is the lack of alternative modes of transport. Unlike in Europe and North America, where large contiguous landmasses allow intercity highways and railways, large parts of Asia can be reached only by air. Geographical barriers include mountainous
Figure 1: Air-travel activity versus economic well-being
JapanIndonesiaMalaysiaChinaIndiaVietnamSpainPhilippinesKoreaItalyFranceUKBruneiNetherlandsUnited StatesDenmarkSingaporeSwedenCanadaAustriaGermanyBelgiumAustraliaSwitzerlandNorway0.00.51.01.52.02.53.03.54.04.55.05.56.0Economic Well-beingGDP per capita US$ 000 Air Trips per capitaAir Travel Activity 50101520253035404550556065707580859095100105
Note: Air Trips per capita is calculated as number of departing passengers divided by total population.
Source: The World Bank, Strategy analysis

Connectivity & Growth: Airports

Connectivity & Growth: Airports

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (6)

Similar to Connectivity & Growth: Airports

Similar to Connectivity & Growth: Airports (20)

More from PwC

More from PwC (20)

Recently uploaded

Recently uploaded (20)

Connectivity & Growth: Airports